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A Reality Check

The market has rallied off of its lows from the third quarter of last year, but the jobs report last Friday is a reminder that the global economy still has room for improvement.

Economists were expecting 201,000 new jobs, and the actual result was only 120,000. The unemployment rate did drop by 0.1%, but an important statistic called the participation rate declined as well. The Bureau of Labor and Statistics only counts people as unemployed if they are actively looking for work; discouraged workers may be out of work, but they aren’t “statistically” unemployed. Bear that in mind when you hear investors getting overly optimistic because of a falling unemployment statistic, as the picture may be more complicated than it appears.

For some good news, the amount of jobless claims (new applications for unemployment benefits) has continued to trend downward, which is a good sign. The number of jobless claims is reported weekly every Thursday, and this can be a volatile figure, so the important measure to look at is the four-week moving average.

This figure is encouraging. If we saw a sudden spike in jobless claims, it could be a sign of another downturn, but that has not happened so far. March could have just been a bad month, as it broke three straight months of +200,000 new jobs, but it is a reminder that growth continues to be slow.

The big difference between recessions in the past and the recent financial crisis is the amount of deleveraging (paying off of debts) that needs to be done to get things back to normal. People cannot spend like they used to when they are still trying to pay off their mortgage or credit card, therefore companies are not as profitable and look to cut costs (i.e., lay people off), and hence hiring is slow.

While unemployment has been improving marginally, investors need to be prudent and remember that there is still a long way to go. An important number to watch for more context will be the consumer sentiment report on Friday. Also, pay attention to any announcements from the Federal Reserve to see if they are reconsidering another round of monetary stimulus based on this lower than expected jobs report.

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